Small Sellers Hit Hard by Supreme Court Sales Tax Ruling

Online sellers may have to change their practices around collecting online sales tax after the Supreme Court ruled in a key online sales tax case. Unless Congress acts, that is - lawmakers have avoided enacting legislation to address the issue until this point.

The High Court ruled this morning: "Because the physical presence rule of Quill is unsound and incorrect, Quill Corp. v. North Dakota, 504 U. S. 298, and National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753, are overruled."

Supreme Court Justice Kennedy delivered the opinion of the Court, in which Thomas, Ginsburg, Alito, and Gorsuch joined. Justices Thomas and Gorsuch filed concurring opinions. 

Justice Roberts filed a dissenting opinion in which Breyer, Sotomayor, and Kagan joined.

You can see the filings on the Supreme Court website.

The Supreme Court heard South Dakota v. Wayfair on April 17, and right out of the gate, the crux of the argument became apparent. Should states expect retailers with no presence to collect a tax that residents of those states are obligated to pay? As we wrote in April in reporting the arguments made before the Court: 

"When South Dakota Attorney General Marty J. Jackley said the state's small businesses on Main Street are being harmed because of the unlevel playing field created by Quill, where out-of-state remote sellers are given a price advantage, Justice Sotomayor challenged that premise.

""Isn't the problem not Quill but the fact that you don't have a mechanism to collect from consumers," she asked. "It's not the merchants who are playing - paying the sales tax; it's the consumer. They're collecting it for you. So find a way to collect from them.""

Other Justices were not as outspoken, and some indicated it was a matter for Congress, not the High Court.

In 1992, the High Court weighed in in a case called Quill vs. North Dakota, ruling that state tax agencies could not force merchants with no physical presence in their states to calculate, collect, and remit sales tax on transactions made to their residents.

In South Dakota v. Wayfair, the question the High Court considered was this: "Should this Court abrogate Quill's sales-tax-only, physical-presence requirement?"

One argument used by those in favor of overturning Quill is that the retail world is very different today from 1992 and that it's an antiquated ruling - some Justices bought that argument

States have become emboldened to defy Quill or devise other ways to try and get the use tax owned to them by their residents for their online purchases from out-of-state retailers.

For example: the "Marketplace Facilitators" laws that require marketplaces like Amazon and Etsy to collect and remit sales tax on third-party transactions. Many small sellers favor this approach since it takes them out of the equation, leaving the administrative tasks to the marketplaces on which they sell. However, for sellers who also sell on their own websites, it's not clear all ecommerce-hosting companies would help them fulfill their possible obligations.

Some proponents of overturning Quill include major retail trade organizations such as the National Retail Federation and Retail Industry Leaders Association. Some opponents of overturning Quill include the National Auctioneers Association and NetChoice, a trade organization backed by online retailers and marketplaces.

Even some of those in favor of overturning Quill seek Congressional action. In January, the National Retail Federation had said it welcomed the Supreme Court's decision to hear the South Dakota case "but also urged Congress to address the issue through federal legislation."

Watch for lots of news and analysis about today's decision, which may have major implications for online sellers - particularly smaller sellers.

Update 6/21/18: The Supreme Court referred to "substantial nexus" rather than Quill's "physical nexus"; eBay takes this to mean small sellers are protected. In a blog post, it urged Congress to act to add a small-business exemption, as we report in this article.

Update 6/23/18: See "Supreme Court Throws Out Longstanding Sales Tax Rule-Book" (link to article)